Originally published July 26, 2010

Keywords: Professional liability, auditor, FDIC, bank failure

The US Federal Deposit Insurance Corporation (FDIC) estimates that by the end of 2010, more than 300 banks will have failed, and that the cost of resolving these failures may reach $100 billion over the next four years.1

To date, there has been only modest litigation related to these failures—the first publically disclosed case brought by the FDIC against directors and officers was filed only recently, on July 2, 2010. However, commentators have suggested more actions are coming. The FDIC is conducting investigations and taking other steps that suggest it anticipates wider litigation.2 According to the former head of litigation for the FDIC, upcoming litigation "could rival the litigation that occurred in the 80s and 90s as a result of the many thrift failures."3 That comparison is particularly unsettling in light of the fact that accounting firms paid more than $1 billion to settle claims related to the Savings and Loan Crisis.4

When a bank fails, the FDIC is an obvious potential plaintiff. But in what capacity the FDIC might file, and which other plaintiffs might bring suit, are open questions. This Legal Update highlights five possibilities.

The FDIC as Receiver

When the FDIC files suit, it ordinarily sues in its capacity as "receiver" of the failed bank. In this capacity, the FDIC acquires the assets and claims of the bank and "steps into the shoes" of the failed institution.5 The FDIC also succeeds to the rights of "any stockholder, member, accountholder, depositor, officer, or director" of a failed bank.6

The FDIC as receiver generally does not have any claims that do not exist as a matter of state law.7 Therefore, when the FDIC asserts claims belonging to the bank, it should be subject to the same defenses as the bank.8 For example, the FDIC should be bound by any permissible contractual agreements between an auditor and the bank, such as provisions governing arbitration or damages.9 While the FDIC has the statutory power to repudiate a contract in its entirety,10 it probably cannot repudiate individual clauses or provisions that it finds burdensome,11 and it may not be able to repudiate nonexecutory contracts.12 If the FDIC does not repudiate the bank's contract with an auditor, then contractual limitations and defenses provided for by the contract should remain available.13 One limitation, however, is that the FDIC may argue that the auditor cannot assert certain equitable defenses to FDIC claims that would have been available against claims brought by the bank.14

The FDIC in Its Corporate Capacity

The FDIC acts as an insurer of funds deposited in banks. As such, it may attempt to bring claims on its own behalf—in its corporate capacity—for losses allegedly caused by negligent audits. While case law suggested that it might be possible for the FDIC to assert such claims in its corporate capacity against auditors,15 a decision by the US Court of Appeals for the Seventh Circuit held that the FDIC cannot sue in its corporate capacity because such claims should properly be brought by the FDIC in its capacity as receiver.16 Moreover, the Seventh Circuit held the FDIC could not evade contractual provisions (requiring arbitration and limiting damages) that would have bound the bank, and FDIC as receiver, simply by bringing claims in the name of the FDIC in its corporate capacity.17

Former Depositors

As a general rule, former depositors do not have standing to bring claims against a failed bank's auditors. Claims for harms common to all depositors belong to the bank, or to the FDIC as receiver. Former depositors will have standing only if they show that they suffered a harm that is distinguishable from the harm generally suffered by depositors. This rule appears to be well settled in federal courts and was recently held to be true as a matter of state law in Illinois.18 However, not all states have weighed in on the issue, and if there are uniquely personal interactions and transactions with a depositor, it is conceivable that a depositor could have a claim under some state law.

Creditors and Other Third Parties

Other third parties, such as creditors, investors, shareholders, or former employees of a failed bank, may attempt to assert claims against an accounting firm. These plaintiffs face several obstacles. As with former depositors, their claims may be barred if the claims belong to the FDIC as receiver, which acquires the rights of "any stockholder, member, accountholder, depositor, officer, or director" of a failed bank with respect to that bank.19

In addition, these plaintiffs face the challenge of showing that the auditor owed them a duty. Many jurisdictions limit the scope of an accountant's obligations to third parties. For example, the Illinois Public Accounting Act shields accountants from liability for negligent misrepresentation to third parties not in privity of contract, unless the accountant "was aware that a primary intent of the client was for the professional services to benefit or influence the particular person bringing the action."20 Accountants can further limit their liability by specifying in writing the parties who are intended to rely on the accountant's representations.21 In an example of limited auditor liability, the US Court of Appeals for the Fourth Circuit held that a former bank president who claimed he relied on an allegedly negligent audit in deciding to accept employment was owed no duty of care by the auditor of the bank's financial statements.22 Other defenses may also be applicable.

Bank Regulators Seeking Sanctions

Bank failures may expose auditors to regulatory actions by bank regulators that seek to impose sanctions.23 There are two primary types of sanctions: (i) suspension or debarment and (ii) monetary penalties or disgorgement. Bank regulators may "remove, suspend, or bar" an independent accountant from performing audit services for federally insured financial institutions upon a showing of good cause.24 The standard for the imposition of monetary penalties or disgorgement is higher.

While bank regulators can impose fines or seek a disgorgement order against parties that engage in unsound practices when conducting banking affairs,25 it has been held in a case brought by the Office of the Comptroller of the Currency that an auditor must do more than merely perform an external audit of a bank to be engaged in banking practices within the meaning of the statute.26 The same statute governs actions by the FDIC, so the same limitation should apply to them.27 Accordingly, it is unlikely in most cases that regulators will be able to seek monetary penalties or disgorgement when the auditor performed only an audit. Furthermore, it is an open question whether the statutory provision permits such action only against the individual auditor or whether it also covers a firm.


1. FDIC regulators close seven banks; failures may cost insurance fund $7.33 billion, WASHINGTON POST, May 1, 2010 (available at http://www.washingtonpost.com/wp-dyn/content/article/2010/04/30/AR2010043003084.html).

2. Litigation Over Failed Banks on the Horizon, FDIC Demand Letters 'Widespread,' FINCRI ADVISOR, Jan. 10, 2010.

3. Id.


5. O'Melveny & Myers v. F.D.I.C., 512 U.S. 79, 86 (1994).

6. 12 U.S.C. § 1821(d)(2)(A).

7. O'Melveny & Myers v. F.D.I.C., 512 U.S. 79, 86 (1994).

8. Note, however, that the FDIC as receiver may bring claims under a different limitations period than the failed financial institution. 12 U.S.C. § 1821(d)(14).

9. The FDIC has prohibited certain "hold harmless" and limitation of remedies clauses in audit engagement letters. See 12 C.F.R. § 363.5(c).

10. 12 U.S.C. § 1821(e).

11. See FDIC v. Ernst & Young, 374 F.3d 579, 584 (7th Cir. 2004).

12. Compare Majeski v. RTC, 1995 U.S. Dist. LEXIS 9541, at *7 (D.D.C. 1995) with Marsa v. Metrobank for Savings, 825 F. Supp. 658, 666 (D.N.J. 1993).

13. O'Melveny & Myers v. FDIC, 512 U.S. 79, 86-87 (1994).

14. See FDIC v. O'Melveny & Myers, 61 F.3d 17 (9th Cir. 1995).

15. See, e.g., FDIC v. Ernst & Young, 967 F.2d 166, 171-72 (5th Cir. 1992).

16. FDIC v. Ernst & Young, 374 F.3d 579, 582-83 (7th Cir. 2004).

17. Id.

18. Courtney v. Pritzker, 2010 WL 625031 (Ill.App. 1 Dist. 2010).

19. 12 U.S.C. § 1821(d)(2)(A).

20. 225 ILCS 450/30.1. See also Doughterty v. Zimbler, 922 F. Supp. 110, 116-117 (N.D. Ill. 1996).

21. 225 ILCS 450/30.1.

22. Ellis v. Grant Thornton LLP, 530 F.3d 280 (4th Cir. 2008).

23. The failure of a publicly traded bank may also expose the auditor of the bank to regulatory investigations by the SEC and PCAOB.

24. 12 U.S.C. § 1831m(g)(4)(A).

25. 12 U.S.C. § 1818.

26. Grant Thornton, LLP v Office of the Comptroller of the Currency, 514 F.3d 1328 (D.C. Cir. 2008).

27. See id. at 1331.

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